The tyranny of the 401(k) industrial complex

If you never watch PBS' “Frontline,” you're missing out on some of the best journalism on TV. I don't agree with every viewpoint they advocate, but each episode is thought-provoking and well done.

Recently, “Frontline” focused on “The Retirement Gamble,” as they titled the piece. It can be summed up by this quote by Zvi Bodie, a professor of management at Boston University: “401(k) plans really place the burden on the individual participant to have an adequate retirement. And the vast majority of ordinary people don't know how to do that.”

It's true. As if you don't have enough going on in your life, you have to become a part-time financial planner and investment manager. You need to figure out how much to save, how to invest your savings, and how to withdraw it in a way that makes it last forever or until you die, whichever comes first.

Of course, you can always get help from the financial-services industry — in particular, the mutual fund providers, since those are the type of investments in most workers' retirement plans. However, many of these folks are padding their own retirement accounts at the expense of yours. Here's how economist Teresa Ghilarducci explained it to “Frontline”: “The 401(k) is one of the only products that Americans buy that they don't know the price of it. It's also one of the products that Americans buy that they don't even know its quality. It's one of the products that Americans buy that they don't know its danger. And it's because the industry — the mutual fund industry — has been able to protect themselves against regulation that would expose the danger and price of their products.”

I'll add another shortfall of the 401(k) industrial complex: You don't have a choice. The 401(k) is chosen by your employer, who might be keeping costs low by passing the costs along to you. I'm on the 401(k) committee at The Motley Fool, and I can tell you that it does indeed cost an employer money and time to provide a retirement plan; it's not as easy as opening an IRA with a discount broker. The plan has to meet all kinds of government-mandated tests to make sure that the plan doesn't disproportionately benefit higher-income employers and owners. So companies that offer a retirement plan deserve some level of gratitude, especially if they match employee contributions. But that doesn't mean these companies spend the time and money necessary to make it the best plan possible.

Then there are the funds themselves. The “Frontline” episode included an interview with one of my heroes, Vanguard founder John Bogle. His best quote: “Do you really want to invest in a system where you put up 100 percent of the capital … you take 100 percent of the risk, and you get 30 percent of the return?”

Where did the other 70 percent of return go? To the fund companies, due to high fees and low performance — in Bogle's words, “The magic of compound returns is overwhelmed by the tyranny of compounding costs. It's a mathematical fact. There's no getting around it.”

My picking of bones

While I generally agree with “Frontline's” call to arms regarding the malfeasance of the mutual fund industry, there are a couple of counter-points I would have liked to see them address. First off, the episode recommends index funds over actively managed funds, featuring more footage of John Bogle, one of the main figures in the birth of index funds. However, it would be interesting to ask him why Vanguard itself has had actively managed funds for decades. Perhaps even the most famous advocate for index investing sees some value in paying a fund manager to pick the investments. And, to Vanguard's credit, the expenses on their actively managed funds are very low. I know because I own a few of them, including a few of their index funds.

The “Frontline” episode also had its nostalgia for the good, old days of defined-benefit pensions, when an employer would reward an employee after decades of service with a monthly check in retirement for life. Like many shows that bemoan the state of retirement in America, they clearly argue that those are better than 401(k)s. However, the truth is that these pensions have their own issues. First off, even at their peak, most Americans didn't have a pension. At least with a 401(k), workers can save for retirement in a tax-advantaged account, something they didn't have before these accounts became prevalent in the '80s. Also, a traditional pension mainly benefited employees who worked for the same company for decades. If you left within, say, five years (as was the case when I was a teacher), you got nothing. The money in a 401(k), however, can be taken with you.

Plus, many pensions don't have enough money to pay future benefits and are assuming (nay, praying) that unrealistically high investment returns will bail them out. Private pensions are backstopped by the Pension Benefit Guaranty Corporation, but that “safety net” itself is underfunded by more than $20 billion. Government pensions are backed by taxes, and they're going to hit hard as more and more Boomers retire. So defined-benefit pensions are not the panacea as they're often portrayed, often using film footage from the '50s (as “Frontline” did).

Finally, the episode featured interviews with everyday Americans who have little in the way of retirement savings, portraying them as victims of the mutual fund companies. In many ways, they most definitely were. Yet, as these people sit in their kitchens and living rooms, explaining their predicaments to the camera, I can't help but notice that they have nice furniture, large-screen TVs and cable. I admit that this is a bit callous of me, but I do have a little less sympathy for people with little in savings but plenty of luxuries. (Yes, cable TV is a luxury.)

Carpe 401(k)-em

The good news for you is that you're taking control; you're reading this blog and probably other sources of financial education. Hopefully you're learning how to save for, and spend in, retirement, and how to evaluate mutual funds along the way. Planning your retirement is up to you; no one is doing it for you. Financial advisers have their place, as long as they're fee-only and fiduciaries (i.e., legally obligated to put your interests first — a standard that doesn't apply to the large majority of financial advisers). But however you manage your finances, ensure that it's doing more for your retirement than someone else's.

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There are 68 reader responses to "The tyranny of the 401(k) industrial complex".

Samsays

Excellent post. The state of retirement savings and the industry should concern all of us. We spend a lot of time on personal finance and my husband has a MBA but I often feel like I’m just randomly guessing when I make my retirement investment selections. Managing your own individual pension plan, which is what we each do, is highly inefficient and costly as the author notes.

I have not had much luck with advisers, I feel like they are just guessing as well and charging a fee to me for doing so. The one time I hired someone I wasn’t impressed with his results at all.

Although, one quibble, expenses are supposed to now be disclosed on your statement.

“As if you don’t have enough going on in your life, you have to become a part-time financial planner and investment manager.”
People have the time, just not the motivation or the foresight to educate themselves on matters as important as this one.

You can take the quote from Teresa Ghilarducci and replace “the 401(k)” with “healthcare” and everything still applies. That’s just as, if not more scary.

The quote from Jack Bogle goes back to my first point. If I can educate myself on how to fix my house or my car, I’ll save money. If I don’t education myself, I’ll spend money to have someone else do it.

“The good news for you is that you’re taking control; you’re reading this blog and probably other sources of financial education. Hopefully you’re learning how to save for, and spend in, retirement, and how to evaluate mutual funds along the way.”
What good is all of this if the savers are going to have to bail out the spenders over and over and over?

I disagree with the statement “people have the time.” I am a working mom. I can’t keep up with all the everyday housework, paperwork, errands, etc. of life already. I do invest, but no, I don’t have time to really figure out what I’m doing. I suspect many other people — working dads, at home parents, people without kids — find themselves just as busy as I do. I confess that I do sometimes take breaks, but I regret it when I do (everything slides into oblivion if I don’t constantly stay on top of things), so no, adding an extensive education in investments is really just one more thing to add to a very full plate.

I’ve never seen anyone so busy that from the time they get up to the time they go to sleep, the can’t incorporate something else into their life.

Are people really that busy 365 days a year that they can’t read a magazine article over lunch once or twice a week or month? Are their people out there that watch 0 minutes of TV a year that could be used educating themselves about finance instead?

Without being too crude, there’s a room in the house where I get a lot of reading done. Everyone uses it and everyone can read a few pages a day there.

When I’m cleaning or doing yard work I listen to music my iPod but I could just as easily listen to financial podcasts or audio books.

I don’t know how old your kids are but if they’re older, this is something you can learn together. Get them started on the right foot.

I don’t buy the “I have no time” argument. You have time, maybe just not a lot of time.

Here’s the deal. Yes, I educate myself (visiting GRS, for example, as well as Mr Money Mustache), and I know I’m not stupid. But taking the time to figure out from all of the options that my employer’s 403b program offers (we’re a nonprofit) which is the best is just too much. It’s a bit overwhelming. I’ve tried to select the best fund I can, but I don’t know that I really have. And the fact of the matter is, while someone may always be able to add something to their life, there are too many “somethings” to add. I should be going to bed earlier. I should be cooking from scratch more often. I should be working on a side gig (and I really want to do that). I should be practicing breathing meditation 20 minutes a day to cope with stress. I should do a better job keeping on top of housework. I should be spending more time with friends, because I feel like I don’t get enough time with them. Do you see where this is going? There are lots and lots of things we need to be doing in life. Something has to give. I am not a financial planning expert, and I continue to assert that I don’t have time to be one. It’s hardly the only thing I need to add to my life; it’s one of a ton of things. Even if I never sat back to read a book for pleasure or took a day of vacation (and I feel like I don’t do those things as often as I’d like), I doubt I could keep up with all the “shoulds” of life. Life is complex, and with two-income or single parent families, long commutes and sedentary jobs that require us to go out and exercise after work, people have to shove a heck of a lot into the same number of hours in a day that our parents and grandparents did… and in the case of my own parents and grandparents, saving for retirement WAS easier. My dad had a pension, and my millionaire grandfather’s investment strategy was simply “invest in bonds.” So, yes, I still maintain that I have no time. I admire those who do stay on top of everything, but I’m not there.

You’re on here and MMM, so you have some time, just not a lot nor as much as you like. Me too.

And you may never know which investment is right for you. In my case, I eliminated the ones I knew weren’t for me and went with what I thought would work best out of what remained. The only way you’ll know whether you picked the best one is after it’s all said and done. Nothing you can do about that.

Get a clue. I was a single mom and one of my two kids is disabled and I spent a ton of time getting him therapies and advocating for him. The investment world is too complicated for people in general. A mom with kids doing every day life cannot even begin to understand stocks, bonds, mutual funds or anything else except whether there is enough milk in the frig and what to make for dinner. Oh, guess what, I have an MBA. And I graduated from a top tier school at the top of my class.

I don’t think we’re talking about day trading or mortgage back securities or credit default swaps. Retirement investing can be as easy as asking yourself when you want to retire, how much you can set aside for retirement each paycheck/month/year, then going on Vanguard or Fidelity or any of those sites, open an IRA and start putting money in a target date retirement fund. People assume it’s harder than that but it doesn’t have to be. People like us who know how to do these things need to help those who don’t know and are intimidated by the idea.

Okay, I didn’t read this before my cranky post above. Yes, this I know how to do. This I have time for. The trouble is selecting the fund from those offered and ascertaining it’s the right one. A few years ago, I noticed a pattern of losing money every single quarter from my fund for an extended period of time. I’m a big believer in buy and hold, and I let it go on for a long time before taking action, but when I noticed that my husband’s fund was earning and mine was not, I finally called a representative from Fidelity and said I was tired of losing money. He said, “Yeah, that fund’s a dog” (then why do you even offer it?) and recommended something else. Was I wise to go with his advice? Well, I’m no longer losing money every quarter, but in the end, I don’t know if I’m in the best place right now. That’s where I feel like I just don’t have time. But, yes, I can use a retirement calculator, and I can sign paperwork to get money set aside in a fund for people who hope to retire by a certain year. I just question how well my money is really invested.

Andy, I agree with you to an extent. I have made an effort to learn about all of my investment options to put myself in the best possible position. However, if I’m going to pay someone to manage my investments for me, shouldn’t there be a reasonable expectation of success? If I am paying for their expertise, I don’t want just average returns. Yet time and time again we’ve found that very few fund managers can get above average returns.

Robert, I’m curious what you think of the employer’s fiduciary responsbility as a 401K administrator. Do you think most employers are dropping the ball on that by offering plans with high fees? I’ve talked with the folks at my company about the different options, and they’ve researched quite a few alternatives and have a system they think works best for most people. It’s not perfect, but they really did put a lot of time and effort into it and regularly seek out feedback from 401K plan members to make sure they’re meeting our goals.
In general, I look at a high fee 401K as a reason not to stay at an employer for the long term. Stay long enough to get fully vested to take full advantage of all those lovely matching dollars, then move on to the next employer and roll the old 401K into a low cost IRA at Vanguard. (Since the rollover can’t happen until after you leave the company – at least at my employer I’m pretty sure that’s the case.)

I generally dislike the 401K system for most of the reasons outlined above. The funds are too expensive and there’s no real choice. If I had my way, I would opt out of mutual funds all together and go with individual stocks. That way, I could avoid throwing tons of money into overvalued companies.

I think that employers and the mutual fund companies are doing people a disservice by auto enrolling them in target date funds rather than the lowest cost index funds that they can find.

This is not a failing of the 401(k) system; it’s a failing of the financial institution that your employer chose, or the plan options that your employer chose. Go to your employer, get a couple of co-workers to go with you, and ask the employer to open the plan up to more investing options.

My employer uses Fidelity, for example, and our plan allows me to invest as I see fit. I have a mix of low expense index funds and mutual funds.

I’m late to (this part of) the party, but this comment keeps eating at me.

Go to your employer and ask for better options…but what if they say no? When employees are entirely at the mercy of their employer’s decision to offer good 401(k) options, bad 401(k) options, or no 401(k) options, THAT IS A PROBLEM WITH THE SYSTEM.

I agree with Sloane. The company I work for allows me to choose whatever I want for my 401k I have stocks, index funds, target date funds and I also have a small cushion of cash all in my 401k. I am allowed to choose my investments how I see fit.

My previous employer’s 401k plan only gave me about 20 options to choose from and none of them were great. It is the employer, not the system.

I’ve never had access to a 401(k) so I use a Roth IRA with Vanguard for my retirement savings. Stories like this make me apprehensive about finally having an employer that offers a 401(k) because the fees may be higher than I’m accustomed to paying. But at least there is still the option of contributing to an IRA – for me and these “victims.”

As a W2 contractor, I don’t have ACCESS to a 401k plan! I would LOVE to put my money away, but the government has decided that people without access to a 401k only need to be able to put away $5500 in a ‘retirement’ IRA… I wish there was another option for my situation.

The more I think about the 401(k) system, the more angry I get. In so many ways, the game is rigged so that the very, very rich can get their hands on everything that the rest of us have.

Of course, there are the fees, as discussed in the article. There’s the push for amateur investors to make their own way in the market – every mistake that one of us makes (panicking and selling when the market is down, for example) is an opportunity for someone else to reap bigger gains for themselves. And there’s the fact that as more and more people reach the traditional retirement age with inadequate savings, they’ll be forced to (try to) keep working longer, competing for jobs with younger workers, which will keep wages low.

I’m actually doing pretty well with my own retirement savings. But I’m fortunate in three ways: I have a job that pays enough to allow me to save far more than I need, I have a natural interest in personal finance, and I’m very good at math. Not everyone has those advantages. Not everyone CAN have those advantages.

“The plan has to meet all kinds of government-mandated tests to make sure that the plan doesn’t disproportionately benefit higher-income employers and owners.”

I’ve never understood the purpose of this rule. I’m sure it had a good intent at one time, but if every employee is offered equal access to the same plan, why should the employer have to, in effect, penalize those who make more than $110,000 because participation is unbalanced? (That is the limit at my company, not sure if it’s true nationwide). This comes from someone who is not really close to making that much money per year.

I work at a large conglomerate company with a propensity for hiring a lot of middle management (read: $$$) along with employing many engineers. We have so many people making over $110k that I believe the company doesn’t even try to balance the 401k participants. Therefore, if you make over $110k, you can only contribute 10% pre-tax.
Ironically, if you make less than 110k, you’re still limited to 25% of your salary. So if you make less than $70,000 or between $110,000 and $175,000, my company won’t let you max out your 401k plan.

I’m so sorry I missed that Frontline! Great overview of the situation. While the structure of modern retirement plans and the lack of regulation is a complete mess, the lack of education of the workforce is an even greater mess. It’s almost like people should be forced to go to a class or something so they are at least armed to face these choices.

It kind of leaves you with the feeling, of “what is the point?” Save, save, save, and then a market crash happens and it’s all gone. Might as well learn how to hunt squirells.

As for the dream of a pension plan, you should all read RETIREMENT HEIST, by Ellen Schultz. I would never accept a job that offers a pension, the contract is not worth the paper it’s written on. My favorite line from the book goes something like this: A company goes before a judge to explain why they are breaking their contract with the retirees. “Well, judge, we did sign this contract, but we really didn’t mean it”. And that is all it took to terminate the pensions for that company.

Another big point of the book is that the money was there for the peons retirement, what is not funded is the executive’s retirement plans, which is pretty much a ticking time bomb and in order to start paying the executives, the companies have had to dip into the employees funds, because the millionare executives just don’t make enough to live on.

Last and not least, as horrible as the system is, it’s still an individual’s responsibility to actually take some interest in this and learn at least something of what goes on with your money. Even though we all lead busy lives, in the end we are on our own, and nobody cares about your money like you do.

Also, when a private company dies, so does the pension in many cases. This happened at the law firm where my grandfather worked for 40 years. Fortunately, he chose AGAINST the pension option, so his retirement was not destroyed.

The pension system itself can lead to abuses, too. You have no benefits, typically, if you work for less than 5 years, and you have extremely reduced benefits until you work for longer than 20 years. Imagine that you finally hit the 20 year mark and now have 40% of your max pay at retirement. You REALLY can’t afford to leave and go somewhere else and build up your pension again–and your employer knows it. So he decides to stop giving you decent raises and promotions, betting on the fact that you’ll either stay and let him pay you less or leave and save the company a bundle on your retirement in 10-15 more years.

BTW, I’m not sure why the Pension Benefit Guaranty Corporation didn’t save the pensions that my grandfather’s coworkers were expecting, but I do know they took a huge financial hit. Perhaps it was because so much of the value of a pension comes in the last few years before retirement. Perhaps it was because only part of their expected retirement was a true pension–maybe the rest was a profit-sharing plan of one sort or another. I do know that many people were hit very hard by the 100-year-old firm’s closure, and what they had expected to retire on did not happen.

This is a nice article. I can understand that it would be difficult as an average American to know how much to save and where to save it, but I feel like it’s something that needs to become a priority to learn. Everyone learns how to drive a car, why can’t everyone learn how to invest and save? It can be very complicated, but it doesn’t have to be. I think that after a couple of hours most people would know enough to be able to do it on there own. They may not get the best returns possible, but they’d at least be in a better spot than not saving at all.

The difference is that car manufacturers, road engineers, drivers ed teachers, traffic cops, and various regulators are all more or less united in the goal of making driving as easy and safe as possible. You don’t have a multibillion-dollar taxicab industry lobbying Congress to keep things complicated and convincing people to leave the driving to the professionals.

I have used Fidelity and Vanguard, and both had extremely informative websites. It’s no harder than picking a couple of the top-rated, low expense funds and then checking to make sure that you have a good balance of stocks and bonds in your mix (Fidelity lets you practice with a hypothetical trade so that you know how a trade will change your portfolio).

For pete’s sake, don’t you have any imagination? Just TRY, a little, for a second, to put yourself in someone else’s shoes.

Imagine you’ve never heard of those companies – or any investment company. Imagine you’re not very tech-savvy, and the websites confuse you. Imagine you you’re intimidated by the terminology that makes no sense to you. Imagine you don’t really understand how to connect your bank account to the investment account. Imagine you’re scared of losing your money. Imagine you’ve never read a PF blog, or been offered a PF seminar, and all you have is a vague sense that you “should be saving something for retirement.” (I’ve heard that from many fellow college grads)

Imagine you have so little money you don’t think any of your effort will matter, anyway.

So yes, actually, it IS hard. This is why NO ONE in this country will have saved enough to retire on, aside from a very small minority. The 401k is a failed experiment, plain and simple.

Please do not insult my imagination or intelligence. Yes, I can imagine never having read a PF blog, not being familiar with retirement vehicles or how to invest. I can imagine all of that, and in fact, I’ve experienced all of it.

But I educated myself, and I think you can educate yourself to and take control of your future. From your reference to your fellow college graduates, I’m guessing that you are young, so you have the time horizon to use to get a handle on your retirement. Do not let the difficulty of the situation overwhelm you, quit worrying about how unfair the system is, and quit making excuses – just do it. You would need to take control of your situation even if we overhauled the retirement system entirely. So get into the habit of spending at least a little less than you earn. Put a little away now. Put more in later if you can. Put it in a savings account if you’re worried about risk. Buy a mutual fund later if you are ready.

Andy and Sloane (and others in this thread), what you are advocating is an individual solution to a systemic problem. The fact of the matter is, the vast majority of people are not saving adequately for retirement. Maybe you think their reasons for not saving are stupid, they’re just making excuses, and all they really need to do is get some personal responsibility and listen to YOU and they’d be just fine. But ultimately, that doesn’t matter, because they’re not (all) going to listen to you, and they’re going to keep on not saving.

A system that works only for a small minority is a system that doesn’t work. Even if you think it’s totally the majority’s fault that the system is failing them.

Sloane, Johanna expressed what I was trying to say much better than I did. As she said, I’m talking about the SYSTEM. It’s not working for most people – shouldn’t we ask why, rather than demand that everyone change?

And thanks for your kind advice, but I wasn’t talking about myself. Obviously I’m on this site because I love PF and find investments and money fascinating, in general. I’m worried about the millions of people who are NOT nerds like me.

Johanna, you said “the vast majority of people are not saving adequately for retirement”. I don’t see how that’s the fault of the system. Just because people choose to or cannot save enough for retirement, for whatever reason, good bad or otherwise, how is the system to blame? There will never, ever, ever be one system to fit all 300+million living in the USA. There won’t be two, three, ten or one hundred systems either. Not everyone can, or sadly, wants to be helped. That’s no reason to scrap what we have, especially when there’s no alternative. I’m lucky, my company uses Vanguard and thus we have good choices in mutual funds and call me selfish but I don’t want that messed with for any reason.

imelda, you said “I’m talking about the SYSTEM. It’s not working for most people”. Are you saying it’s not working for those who participate in the system, meaning those who save in 401(k)s, IRAs or similar retirement vehicles? If so, what’s not working? Do they not have enough saved, are they not getting the returns they should, what specifically isn’t working?

Andy, there is a fairly simple solution that does work for everyone, called a public pension. It works in many other countries (countries that are certainly in no worse financial state than we are) and could work here.

Imelda, the article is interesting and informative, but it still makes the basic point that people need to save more. The national personal savings rate is around 2% – that’s the problem. Sure, the system can be reformed to make fees and fiduciary duties more transparent. That seems fair and reasonable. But until people save more, they will not have savings available to them in the future.

Public pensions are just another way of forcing people to save. In fact, we already have a public pension (Social Security), so if you want increased benefits from the government, you have to increase taxes significantly. In other words, force people to live on less now so that they can have more in the future.

The significant downside to public pensions (and any defined benefit plan, even employer or union sponsored) is that public pensions let a third party decide how much the beneficiary gets to live on (see, for example, the president’s recent budget proposal where he proposed an annuity based determination of “reasonable” retirement benefits). A third party doesn’t know if individual beneficiaries want to retire early, or travel, or take care of family members in their retirement. That value is not included in the government’s calculation of your benefits. Given that personal finance is so very personal, the idea that I would turn my financial future over to the government’s control is a non-starter.

“force people to live on less now so that they can have more in the future.”

Well, yes. That’s called “saving,” and it’s exactly what you’re saying individuals need to be doing anyway. So what’s the problem?

Your “significant downside” is not a downside at all. Even under a vastly expanded Social Security system, individuals are still free to save more on their own, if they want a retirement that starts earlier or is more luxurious than what the system provides.

@Sloane: Exactly. Precisely. With your usual acuity, you have hit the nail on the head!

(sorry, couldn’t resist that quote)

Anyway, it strikes me that I agree with everything you said, aside from your conclusion.

You identified the problem: “But until people save more, they will not have savings available to them in the future.”

People aren’t saving. How can we change that?

“Public pensions are just another way of forcing people to save.”

Huzzah! That’s my conclusion.

You pointed out some downsides, which Johanna responded to. In my opinion, the downsides you pointed to are FAR less grave, and easier to resolve, than the downside of relying solely on the 401k system, which is mass poverty of the elderly (i.e. the epidemic we had before SS).

All the talk about “There is no one-size-fits-all solution” is nonsense. The path toward a comfortable middle-class retirement is pretty much the same for everybody, so there’s no reason, logistically, why it can’t be orchestrated on a large scale. To the extent that there IS individual variation, it’s entirely due to individuals wanting MORE than basic comfort – which, as I said, they’re perfectly free to save for and provide themselves. Anyone who says that we need to preserve individual choice in retirement savings is almost certainly trying to sell you something that almost certainly is not good for you.

The poll about fees is a really good example of the level of innumeracy we’re dealing with here. Calculating percents is pretty low-level math, but putting them in context – understanding what’s a percentage of what – is a skill that most people haven’t quite mastered. So we need a system that doesn’t require them to have mastered it.

How to save, sure, that’s easy. But, saving correctly is what is at issue. I actually spent 5 years working at a major mutual fund company (although in IT, not in the funds side), and you would think I’d be an expert at saving for retirement after having so much exposure. Nope. You basically learned to “save, put money into your 401k, it doesn’t matter what fund, just invest here.” And I believed it. How do you know who to listen to? People want to invest at Fidelity or eTrade or wherever because they see the commercials and think they can trust them. Can they? What happens when someone who is already investing with a poor financial planner suggests that you go with them? Should you listen to them? How do you know? What does any of this mean?

When you’re talking about someone who is a blue collar worker, uneducated, and makes very little money in the first place, they just don’t have the skills to make these types of decisions. It can be frustrating. Assuming everyone can do it is false.

Agree. I would love to have regulation that required the investment companies to show you how much you paid in real $ every year to them as it is impossible to figure out. The number would shock most people. I definitly try to keep the expense ratios are low as possible and pretty much just do indexing becuase of it.

I think a good approximation of the fees that 401k companies charge you can be calculated by comparing your total contributions to the plan (from old W-2s or year end paystubs) to the present value of the plan. This will give you your real rate of return percentage from your 401k investments. Compare this percentage with the rate of return that the 401k plan statements say you earned. The difference is the amount you paid in fees to the 401k company.

You can also take the total expense ratio for each mutual fund you own and multiply it by the dollar amount of your holdings in each particular mutual fund to determine your annual fees for owning the mutual fund within a 401k plan.

Your quote of Zvie Brodie reminded me of another issue perplexing observers: the low voting percentage. So, Gallup or one of those polling companies did a phone survey, which went like this:

Q: Good evening, Sir. We’re doing a quick survey about the low voting turnout. So please tell us: do you think the problem is ignorance or apathy?

A: I don’t know, and I don’t care.

Comical, and perhaps not exactly true, but it highlights that Brodie only got one part right when he said that people don’t know how to take care of their retirement.

I believe the problem is bigger: more than not knowing, most people don’t want to sacrifice spending and save for the future.

Yes, the 401(k) system has many flaws. But when I woke up and used it to the extent allowed, it made an enormous difference. We’re now retired (mostly) and probably would not have been in our position were it not for the 401(k) system.

I am sad that I missed that Frontline as I generally like their work, even if it’s simply thought provoking and I don’t agree. I would agree with many of your points and great catch on the Vanguard and actively managed fund issue. From my experience, I have seen that too many employers simply do not care to provide a good and beneficial 401K plan to their employees. It really is sad as it can just load it down with needless fees. That said, there’s also something to be said of those that do not invest at all. I would rather earn something(even with fees0 then to do nothing and have no retirement planning at all.

I don’t think the 401k system is that bad. Yes it has it flaws but no more than most legal or financial aspects people deal with in life, buying car, house, marriage, divorce, transactions, etc… Most of the people that I know spend way more time doing things they enjoy or spending time and lots of money on luxury items. It never took me more than an hour or two to go into and look at a couple funds electronic prospectuses, to determine fees and investment strategies. From there I would usually pick the lowest index funds and do my assest allocations however I wanted, set my percentages and rebalance ocassionally. Also as income went up so did my savings rate, both in taxable and retirement accounts Meanwhile my friends spend 25 hours a week playing video games. So while there networth has barely moved, mine has sky rocketed, our income is close to the same. No one is going to care about your own financial future more than yourself. By the way, you don’t need more than 8th grade Math to figure this stuff. Most of the retirement calculators are automated and i save extra to err on the side of caution.

People use the flaws of the 401k system as an excuse not to save, that combined with their own desires to spend their own money. If we used the flaws of everything in society not to take action, we would never have done anything. I don’t care how busy you are, you have an hour a month to plan for your future financial self. Heck if you just saved as much as you could in a target fund over the long haul you probably would be alright. Most people will get more from the % of saving vs their actual returns.

I agree–I also think people are just intimidated by retirement accounts, so they never really try to understand them. Many people don’t really get what mutual funds and index funds are. They probably think saving for retirement means choosing individual stocks, and they figure they don’t have the financial education to do that so they may as well avoid the stock market altogether.

I have that Frontline episode on my DVR. Will have to check it out soon.

“By the way, you don’t need more than 8th grade Math to figure this stuff.”

I disagree. I mean, you don’t need to do any integrals or derivatives or sines or cosines, but the numerical intuition that comes from having had a lot of advanced math classes is actually really, really helpful. So is a solid understanding of probability and statistics. There’s a reason that finance companies and hedge funds like to hire math geniuses.

As a gen y’er (and as a witness of the portfolio crash of several gen x’ers right before their retirement) I am not putting all of my eggs into the 401k basket, and I’m putting even less eggs into the social security one. In fact, I pretend social security doesn’t even exist (I’m not going to be an extremist that says that it won’t….but I will say it’s possible).

My plan for retirement is a mixture of 401k, Roth IRA (because I don’t plan on earning much job income in my life…not counting rental income which doesn’t even calculate into ss benefits anyway), high yield savings account/ cd/ bonds investments, and aforementioned rental property income/ sales of long-held, long paid off properties before retirement.

I want to always be in a situation where I can turn to multiple streams of income, if one gets dammed. I’ll be buying my first income property in early 2014, and a second one in early 2015, including my house that would make 3 properties in 3 different cities. When I go back to school in 2016 in order to transition to a career that will earn me 30% less, but make me 1000% happier, I’ll live in one of the properties, with roommates, and rent the other two out, and hopefully with that income plus some savings I’ll be able to take up to 2 yrs off from working in order to be a full-time student without taking out student loans.

The idea of having multiple income streams in the future has relaxed my views of the “sacred” 401k and I plan on breaking my own rule of never borrowing from your 401k. In my situation it’s a pre-medicated maneuver and not one of distress, plus it’s going towards helping me come up with the 20% down on the first rental sooner, so I can get a tenant in there well before I need to move, and without depleting all of my liquid cash, so I don’t feel guilty about it. Because I have a plan for income in retirement, I feel more comfortable treating my 401k as any other account (within its restrictions of course). I can borrow up to 50% of the amount in my 401k, with interest but the interest goes right back into my account so I’m paying my future self interest really, and I have up to 5 yrs to pay it back; though I’ll be paying it back in 1 Â½ or less. Of course all the while I’ll still be contributing up to my employer’s match.

It seems to me that a figure I read says the average American watches 4 hours of TV a day – and they don’t have time to study a little investing theory? Sorry, I don’t buy it. Anybody can buy a target date fund and stuff as much money as they can afford into it, it’s not rocket science.

The real problem I have right now with the system is the artifically repressed interest rates – safe bonds are paying less than the inflation rate, so people are putting themselves at more risk than they really want to in order to get any sort of return. That’s what chaps my hide.

I don’t imagine you should base whether or not someone has the time to research their retirement accounts based on statistical averages of television viewing.

First off, the 4 hour a day number takes into account the retirees and non-workers, who presumably watch way more than this a day. It is rather unlikely that those who are actively contributing to a 401K account and could benefit from further research are spending that much time in front of the boob tube. Plus, the reality is that many Americans are exhausted after a long day of work and commuting. So what if they opt to watch the next episode of Mad Men or Dancing with the Stars when they get home? I know in my experience this behavior in the evening is coming from a point of mental and physical exhaustion.

Yes, we should all take more ownership of our investments. We can certainly agree on that, but I would not discount the reality that people are overworked and stressed as a whole and unable to take on further financial research. Plus the people who probably need it the most are the least likely to pursue it on their own time.

I am a firefighter and have a hazardous duty pension… I also contribute to a 403B plan… as a 401K… that is tax deferred to supplement my retirement… the state has just switched to a hybrid plan… a mix of both… due to the state not properly funding the pension plan for years and putting the money in a general fund. I will take my hazardous duty pension plan any day over a “Define contribution” plan. I want to know how much I am getting upon retirement…50 percent of my high 3 years not risk my retirement on wall street and the market, all the while the CEO’s of Wall Street walk away with million dollar bonuses as my fees take away the power of compounding.

As the special pointed out, 401(k)s were created as a tax dodge for the hyper wealthy; they were never intended to be a way for average wager earners to accumulate nest eggs. As a result, they don’t really do that good a job. There are two huge problems with the 401(k)s – they are only as good as the company they are tied to, which means their quality is all over the map, yet they are touted as “one size fits all.” The other is that they are a lot more about making profits for the investment houses than they are about accumulating wealth for the individual. Do not be fooled. Nobody in this mix really gives a wet slap about whether you sink or swim; the people “managing” your money are in the game to get as much of it as they can get their hands on. That’s the part you can never forget for a moment.

I do have a bone to pick with you Mr. Brokamp. How do you KNOW those people have cable? If you come to my house, you’ll see a large screen TV. But there’s no cable service attached to it. Never has been. When the change to HD broadcasts came in, I had to buy a new TV set, and it was cheaper to buy the larger set. If you look at the back of your set, you will see there is a slot marked “antennae”; people like me are why that is there. (Though the cable companies are trying to ram through legislation to end that.) So don’t be so quick to judge these people as “non-savers still indulging in luxuries” just because they haven’t sold their TV sets on Craigs List. There’s a lot of this “blame in victim” attitude running around right now; I think it’s a defense mechanism so we don’t have to face how so very easily – one car wreck, one heart attack, one stroke of bad luck – we could be in their shoes. It is very human, but it is neither kind nor right.

It also strikes me as funny – in a not-laughing kind of way – when people judge others for their “luxury” purchases. So, what? These people should put off EVERY frivolous expense until they…escape poverty/debt/are financially independent?

Few people who are poor believe they will ever not be poor, let alone that saving $50 a month on cable will help them get there.

A Carter, I am vigorously nodding my head in agreement. I own a HUGE plasma TV, which I bought for $250 from a friend who’s a serial upgrader. He just had to have a 3-D TV. There is no cable or even antenna hooked up to it. I get my movies from the library, yard sales, Swap-A-Dvd and the like.
My house is lovely, but most everything I own is from consignment, Craigslist, estate sales, etc. Laughing all the way to the bank and looking good doing so.

OK, so I’ve posted a slew of negative comments to this blog entry, and I think perhaps I should explain why.

I hate the 401k system. It’s like telling everyone to go on a diet for 40+ years, and letting that serve as a substitute for health care. It’s nonsensical, and unrealistic. People who are struggling to get by – and most people feel like they are struggling to get by – are not going to save the amounts of money they need to fund a retirement decades away. They’re not going to invest wisely – instinct is always to buy high and sell low. They, like my mother, just figure they’ll work until they’re 75, without thinking about how their bodies will tolerate that.

Worst of all, the system is rigged against them – exorbitant expense ratios and commissions, lack of fiduciary duty from *anyone* they interact with, etc etc.

I’m not saying that private pensions are a perfect solution – there were flaws with that system, too. (though someone else referenced the book ‘Retirement Heist’, which explains how perfectly solvent pension plans were raided by corporate executives until they become “underfunded”)

I don’t know exactly what my argument is. But it all just feels so unfair. “Personal responsibility” increasingly becomes the watchword, as fewer jobs are available at lower wages and with less security. And god forbid anyone try to live a decent life while trying to figure things out – if they have cable TV without a fully-funded IRA, then obviously they deserve to be poor, right?

“It’s like telling everyone to go on a diet for 40+ years, and letting that serve as a substitute for health care.”

I like this analogy a lot. Nagging one person to go on a diet might or might not work. Nagging EVERYBODY to do the same, almost certainly will not.

Personal responsibility is just that – personal. At the individual level, when you’re looking at any given person who’s failing in their retirement savings, maybe there’s a legitimate argument to be had about whether they could or should have been more responsible. But when the vast majority of people are failing, the problem isn’t that the vast majority of people don’t have enough personal responsibility. The problem is that the system is broken.

I think the solution has got to be a public pension – a vastly expanded Social Security system. The Social Security system we have is working well (to the extent that there’s an entitlement spending crisis, it’s almost entirely due to Medicare, not Social Security – and Medicare is still doing a whole lot better than private health insurance). People like Social Security, and they want more of it, not less of it. Unfortunately, politicians are not getting the message.

Having been involved in IRAs, 401(k)s, and now a 403(b) I helped design, a couple of observations:

– Everyone makes mistakes.
My wife’s IRA was a backloaded variable annuity dog for 7 years. We moved it out into Vanguard index and made more money in two years than the previous 10.
I learned. She learned. We earned.

– Those little bits add up.
I was in a bad 401(k) plan, but I saved to get the match, and was conservative in a bond fund because of the lousy, murky funds. As I learned, I spread my wings into other funds. (Especially after the company I was working for vastly improved the plan by jumping to Fidelity.)

– As a participant, these plans are not rocket science.
Check the vesting rules. Invest to catch the match. Pick a low-fee, no-brainer fund (preferably index) that lets you sleep at night. Then leave it alone. Don’t like the other choices in the plan? Get an IRA on the side in something you do like.

-Â The comments about weird, outdated federal rules on high earners are spot on.
There is no reason we can’t have a one-size-fits-all federal template for IRAs, 401(k)s, 403(b)s. Same rules, same limits, done and done. But politicians and bureaucrats and fund owners don’t like simplicity.

– If you think the plans are complicated now, wait till you start to draw the money out.
Your federal government has big, big plans for you! Big, complex, hard-to understand plans designed to trip you into more tax liability! :(

– My totals have been up and down. I have won and lost.
But overall, my account is worth much, much more than what I have personally put into it.

– My two biggest mistakes:
Not starting earlier, and not plowing half of every raise into reaching the maximums sooner, regardless of my fund choices.
And not starting an IRA when 401 and 403s were not available to me. I wasted that money on whiskey and motorcycles. (Not cable.) :)

Do fund companies make money on this stuff, large amounts of money? You bet. Do fund companies and employers do a bad job/good job with them? You bet.

But it is the only game in town for serious, tax-advantaged saving for retirement, so learn the rules, and get going.

Self-help books like to diffrentiate between being poor and being broke.

Being broke is a temporary financial condition where you don’t have enough money to buy what you want.

Being poor is a mindset, where you don’t see youself as achieving any kind of success or any kind of wealth. It’s a mindset where you don’t look ahead to the future and are not willing to suffer delayed gratification for wealth in the future.

Consequently, poor people spend all their money now to make themselves happy now, to buy tangible things like big-screen TVs and to buy intangible things like vacations. They blame everyone else for what they don’t have.

I actually think there’s a kernel of truth here, which is that attitudes toward money make a big difference. But I don’t think that good or bad attitudes can always be turned on or off like a lightswitch. We’re all a product of our environment.

Among the advantages I’ve had in life is the privilege of being born to parents who are good with money. I’ve had a lifetime to learn by example that shopping around, questioning whether unnecessary purchases are things you really want, and saving up small amounts of money over long periods of time are worthwhile things to do. My parents didn’t have super-lucrative jobs, but they retired as millionaires at age 58.

Because of the lessons they taught me and the example they set, I’m more motivated than most people to save for my own retirement. If they had been different, I would be too.

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My name is J.D. Roth. I started Get Rich Slowly in 2006 to document my personal journey as I dug out of debt. Then I shared while I learned to save and invest. Twelve years later, I've managed to reach early retirement! I'm here to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you get rich slowly. Read more.

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